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  1. #1
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    Oct 2009
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    Default Getting Capital Gains Out of Spouse's Condo Converted to Rental

    My question involves real estate located in the State of: Illinois

    Hi,
    My wife and I were married about 1-1/2 years ago. She had a condo and I had a house. We moved into my house and have been renting out her condo since July this year. I would like to get some capital gains out of her condo tax free if possible but don't want to sell it to a third party. She lived in her condo for 5 years prior so I figure we have 3 years to do something. She is the only one on title and I would like to buy her condo for fair market value which might be around 40k more than she bought it for. Can I buy it without going to the standard procedure which would involve more expenses? I was thinking she could carry back a mortgage for the entire amount, or close to it, and could keep paying on her current mortgage. I that possible? Do I have to record the sale to make it valid for tax purposes? Would her mortgage company to call the mortgage due if I did? If I didn't have to record it what would happen with the tax bills? Would I owe some type of transfer fees?
    Thanks

  2. #2
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    Mar 2008
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    Default Re: Getting Capital Gains Out of Spouse's Condo Converted to Rental

    Quote Quoting dale426
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    My question involves real estate located in the State of: Illinois

    Hi,
    My wife and I were married about 1-1/2 years ago. She had a condo and I had a house. We moved into my house and have been renting out her condo since July this year. I would like to get some capital gains out of her condo tax free if possible but don't want to sell it to a third party. She lived in her condo for 5 years prior so I figure we have 3 years to do something. She is the only one on title and I would like to buy her condo for fair market value which might be around 40k more than she bought it for. Can I buy it without going to the standard procedure which would involve more expenses? I was thinking she could carry back a mortgage for the entire amount, or close to it, and could keep paying on her current mortgage. I that possible? Do I have to record the sale to make it valid for tax purposes? Would her mortgage company to call the mortgage due if I did? If I didn't have to record it what would happen with the tax bills? Would I owe some type of transfer fees?
    Thanks

    I don't understand the part about "I would like to get some capital gains out of her condo tax free if possible".

    There is unlimited gifting between spouses, so she can gift you the property simply by "quit claiming" the property over to you, which is the most direct and inexpensive way to do it, and there is no "capital gains" tax involved. There is no need for you to buy it.

  3. #3
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    Default Re: Getting Capital Gains Out of Spouse's Condo Converted to Rental

    Quote Quoting SChinFChin
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    I don't understand the part about "I would like to get some capital gains out of her condo tax free if possible".

    There is unlimited gifting between spouses, so she can gift you the property simply by "quit claiming" the property over to you, which is the most direct and inexpensive way to do it, and there is no "capital gains" tax involved. There is no need for you to buy it.
    What I mean about "I would like to get some capital gains out of her condo tax free if possible" is that in converting her property to a rental, she would lose the chance to get the capital gains, up to this point, tax free since it was her primary residence for 2 of the last 5 years. If I bought it from her now I could also establish a higher cost basis for depreciation.

    If she quit claims the property over to me as you mentioned, will this accomplish what said above? And what about the mortgage company when I record the quit claim?
    Thanks for the help

  4. #4
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    Default Re: Getting Capital Gains Out of Spouse's Condo Converted to Rental

    Quote Quoting dale426
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    What I mean about "I would like to get some capital gains out of her condo tax free if possible" is that in converting her property to a rental, she would lose the chance to get the capital gains, up to this point, tax free since it was her primary residence for 2 of the last 5 years. If I bought it from her now I could also establish a higher cost basis for depreciation.

    If she quit claims the property over to me as you mentioned, will this accomplish what said above? And what about the mortgage company when I record the quit claim?
    Thanks for the help
    OK, I got you.

    While it's true that if she lived in it for the last 2 of the 5 years, she can sell it "capital gains tax" free, if I were you, I would check with an attorney to see if there are particular rules for wive's selling to husbands, as it often is not an "arms length transaction". What could happen is that you can artificially inflate the sales price, since she pays no "capital gains", which increases your basis later on, lowering your capital gains tax later on, while upping your depreciation in the meantime.

    I don't know if the IRS would have a big issue with it. In fact, if you artificially inflate the value too much, you might wind up with a capital loss later on. You may also need an appraisal as someone I worked with gifting property to his daughters was requested by the state tax authorities to produce an appraisal.

    As to the mortgage, for most mortgages, you can continue to pay the same mortgage if the property is transferred to you as transfer of properties between spouses does not trigger the "due on sale" clause as it is an exemption spelled out in the "St Germain" act. See exemptions under paragraph (d) sub par. (6):

    http://www.law.cornell.edu/uscode/12...1---j003-.html

    Having said that, there are some special mortgages that has rules of it's own, issued by state or Federal government authorities, special programs etc., so you'll have to have an attorney review the mortgage documents, that the St Germain law may not apply.

    If it was just quit claimed, you'll depreciate it on the basis that she bought it at. Now, does it make such a big difference annually comparing the two depreciation values to go thru the trouble of a sale??

    You'll certainly lock in some savings in the capital gains tax though.

  5. #5
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    Default Re: Getting Capital Gains Out of Spouse's Condo Converted to Rental

    Quote Quoting SChinFChin
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    OK, I got you.

    While it's true that if she lived in it for the last 2 of the 5 years, she can sell it "capital gains tax" free, if I were you, I would check with an attorney to see if there are particular rules for wive's selling to husbands, as it often is not an "arms length transaction". What could happen is that you can artificially inflate the sales price, since she pays no "capital gains", which increases your basis later on, lowering your capital gains tax later on, while upping your depreciation in the meantime.

    I don't know if the IRS would have a big issue with it. In fact, if you artificially inflate the value too much, you might wind up with a capital loss later on. You may also need an appraisal as someone I worked with gifting property to his daughters was requested by the state tax authorities to produce an appraisal.

    As to the mortgage, for most mortgages, you can continue to pay the same mortgage if the property is transferred to you as transfer of properties between spouses does not trigger the "due on sale" clause as it is an exemption spelled out in the "St Germain" act. See exemptions under paragraph (d) sub par. (6):

    http://www.law.cornell.edu/uscode/12...1---j003-.html

    Having said that, there are some special mortgages that has rules of it's own, issued by state or Federal government authorities, special programs etc., so you'll have to have an attorney review the mortgage documents, that the St Germain law may not apply.

    If it was just quit claimed, you'll depreciate it on the basis that she bought it at. Now, does it make such a big difference annually comparing the two depreciation values to go thru the trouble of a sale??

    You'll certainly lock in some savings in the capital gains tax though.
    Thanks SChinFChin.
    If for example the condo is worth $175k and the amount owed is $120k..... Assuming the transfer of the mortgage to me doesn't trigger the "due on sale" clause, can I do that and also have my wife take back a note for $55k? I'm just looking for a way to establish a new cost basis. I think I can find some comps for around that amount so I would not be artificially inflating the price if it were questioned since it wouldn't be an "arms length transaction".

    $55k is not a huge amount of difference in the depreciation amount each year since it's figured over, what, 27.5 years? But I'd like to avoid paying anything extra if I don't have to. I was just hoping it would be simpler.

    I looked around on the internet to find out if there were any restrictions or rules regarding interspousal real estate transactions but couldn't find anything pertinent. Any suggestions on finding a good real estate attorney in IL?

    Thanks

  6. #6
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    Default Re: Getting Capital Gains Out of Spouse's Condo Converted to Rental

    Quote Quoting dale426
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    Thanks SChinFChin.
    If for example the condo is worth $175k and the amount owed is $120k..... Assuming the transfer of the mortgage to me doesn't trigger the "due on sale" clause, can I do that and also have my wife take back a note for $55k? I'm just looking for a way to establish a new cost basis. I think I can find some comps for around that amount so I would not be artificially inflating the price if it were questioned since it wouldn't be an "arms length transaction".

    $55k is not a huge amount of difference in the depreciation amount each year since it's figured over, what, 27.5 years? But I'd like to avoid paying anything extra if I don't have to. I was just hoping it would be simpler.

    I looked around on the internet to find out if there were any restrictions or rules regarding interspousal real estate transactions but couldn't find anything pertinent. Any suggestions on finding a good real estate attorney in IL?

    Thanks
    No, nothing like that, no notes needed. Property transfer amongst spouses is unlimited, and all you need is a QC deed. But go out, hire an appraiser, and use that value in the transaction.

    As to spousal transactions, I took a real estate legal course once, and it falls into a category called "related party transctions". I don't see much discussed amongst spouses in it either.

    I was involved in the gifting of properties amongst my relatives a few times, and I had to get appraisals done. There is range, and if it is for YOUR benefit, they asked if you need the high end of the range or the low end. I know it doesn't sound kosher, but I was asked by the appraiser who the appraisal is for, as it is usually for a bank, but I anwered it was for me, and it's to establish a basis for gifting.

    You would purchase the property under what is called a "Sub 2", short for "Subject to" trasnaction, meaning, subject to the mortgage.

    You'll establish a new cost basis of $175,000 (if that's the appraisal) , as set in the P&S contract, do a land/building ratio, as you'll only depreciate the land. For somthing like a condo, a land value of 20% of the total would not be challanged.

    What you do is have a Purchase and Sale contract prepared, subject to your assumption of the outstanding mortgage, the property is "quit claimed" to you, and that's it.

    If the transaction is done with someone other than your wife, you'll need to submit a gift form, but it'll forever count against your unitary credit for estate taxes. Instead of that,do it via annual gifting, have a note prepared, but if it's intended as a gift, write a letter forgiving $13,000/year. To keep it legit, in the meantime, pay the imputed interest on it.

    For your wife, she'll have to report a capital gains on her income taxes, but as a sale of a home. One thing I don't know is if it would cause any complications if the two of you file jointly as both the purchase and the sale of the property would show up on the same tax return. Filing separate returns would certainly take care of it.

    I beleive though, the laws I see are written to allow limit free transfers of property between spouses, and not much thought given to creating purchase and sales to change new basis as you are looking to do here.

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